Extra Bucks From 7thPay Commission Recommendations: Invest Wisely

Hemant Rustagi

Chief Executive Officer, Wiseinvest Advisors 

Implementation of the recommendations made by the 7th Pay Commission has brought about an overall increase of 23.55 percent in salaries and pensions. The starting salary at the lowest level has been fixed at Rs.18,000 per month and for direct recruit class I officers, the starting salary will be Rs.56,100.

While the government employees and pensioners can get tempted to splurge the lump sum amount, they will do well to assess their needs and avoid spending it randomly. Although there is nothing wrong with spending a part of the windfall on something one may have coveted for long, but it should be done after reviewing the needs. However, as a thumb rule, a significant part of the windfall should go into investment kitty.

The lump sum amount can be utilised either for an important goal round the corner or pre-paying a loan. Of course, the decision to pre-pay a loan will depend upon factors such as rate of interest, type of loan, tax benefit and the remaining period for repaying the loan etc. For example, if there is a personal loan or a credit card loan, it would makesense to repay them. Similarly, if not much time is left for completion of the term of a loan, it may not be advisable to pre-pay, irrespective of the interest rate. As for allocating this money towards investment goal/s, if there is a shortfall in more than one goals, one must prioritise.Similarly, the monthly hike can be allocated- at least a part of it- to top up investments for important investment goals or increasing the EMI for loans. Many a times, in a situation like this, there is a tendency to focus only on the lump sum and the monthly hike often gets ignored resulting in that amount getting spent randomly.

In terms of investment strategy, there could be a dilemma about the asset class and how to invest into it. Needless to say, both these are important aspects and hence need to be tackled in a manner that allows one to get the best in terms of returns without getting exposed to undue risk.

A goal-based investment approach can go a long way in ascertaining which asset class to invest in and how much to invest for each of the goals. For long-term goals, equity and equity oriented funds can be an ideal investment option. In fact, considering the tendency of the stock market to turn volatile from time to time, a strategy of investing in a disciplined manner can not only help in tackling the volatility but also turn it to one's advantage through "averaging". Therefore, a combination of investing a Systematic Transfer Plan (STP) for the lump sum amount and SIP for investing monthly hike could be an ideal strategy. Remember, a disciplined approach goes a long way in redefining one's risk profile and enhancing exposure to equities in a carefully planned manner.

For the pensioners, one of the major challenges is to generate adequate regular income to cover all their regular expenses and also get some growth to tackle inflation. In fact, this challenge can be quite stiff for those retirees who may have already locked-in their money at a pre-decided rate in traditional options like fixed deposits, bonds,debentures and small savings schemes. Since the guaranteed return caps the return, one often struggles to keep up with inflation.

Therefore, it would be wise to start the process of investing in market linked products like equity savings funds, balanced advantage funds and equity oriented balanced funds. These funds have the potential to not only provide higher post tax returns than traditional options, but also can help in augmenting income through dividend on a monthly or quarterly basis. While there will be attendant risks of investing in equities in varying degree, keeping over-all exposure to equity at lower levels can curtail volatility and enhance overall portfolio returns. Broadly speaking, the emphasis should be on ensuring that one doesn't outlive one's retirement savings.